diff --git a/.dockerignore b/.dockerignore
index fe5669be..4d50ab09 100644
--- a/.dockerignore
+++ b/.dockerignore
@@ -8,5 +8,8 @@ tmp
 state
 build
 dist
-assets
 Godeps/_workspace/pkg
+tests/integration/.venv*
+tests/integration/.tox
+*/*/*/*.pyc
+*/*/*/__pycache__
diff --git a/.dockerignore.docker b/.dockerignore.docker
index b36c0d26..0b3eb86d 100644
--- a/.dockerignore.docker
+++ b/.dockerignore.docker
@@ -7,5 +7,8 @@ gopath
 tmp
 state
 build
-assets
 Godeps/_workspace/pkg
+tests/integration/.venv*
+tests/integration/.tox
+*/*/*/*.pyc
+*/*/*/__pycache__
diff --git a/.gitignore b/.gitignore
index 342b3516..38ff8a7b 100644
--- a/.gitignore
+++ b/.gitignore
@@ -10,3 +10,5 @@
 /tests/integration/MANIFEST
 /tests/integration/.venv*
 /tests/integration/.tox
+*.pyc
+__pychache__
diff --git a/Dockerfile.build-base b/Dockerfile.build-base
index 3355c155..50c7e335 100644
--- a/Dockerfile.build-base
+++ b/Dockerfile.build-base
@@ -2,7 +2,8 @@ FROM debian:jessie
 RUN apt-get update && \
     apt-get -y dist-upgrade && \
     apt-get -y install locales sudo vim less curl wget git rsync build-essential syslinux isolinux xorriso \
-        libblkid-dev libmount-dev libselinux1-dev
+        libblkid-dev libmount-dev libselinux1-dev genisoimage qemu-kvm python-pip
+RUN ln -s /usr/bin/genisoimage /usr/bin/mkisofs
 RUN locale-gen en_US.UTF-8
 RUN curl -sSL https://get.docker.com/ | sh
 
@@ -11,6 +12,8 @@ RUN curl -sSL https://get.docker.com/ | sh
 #ENV LC_ALL en_US.UTF-8
 #ENV TERM linux
 
+RUN pip install tox
+
 ENV GOLANG_VERSION 1.4.2
 RUN curl -sSL https://golang.org/dl/go$GOLANG_VERSION.src.tar.gz | tar -v -C /usr/src -xz
 RUN cd /usr/src/go/src && ./make.bash --no-clean 2>&1
diff --git a/Makefile.docker b/Makefile.docker
index 761afc39..b0ff821a 100644
--- a/Makefile.docker
+++ b/Makefile.docker
@@ -60,5 +60,7 @@ build-all: \
 	$(DIST)/artifacts/rancheros.iso \
 	$(DIST)/artifacts/iso-checksums.txt
 
+integration-tests:
+	cd tests/integration && tox
 
-.PHONY: build-all installer version bin/rancheros
+.PHONY: build-all installer version bin/rancheros integration-tests
diff --git a/assets/empty-hd.img.gz b/assets/empty-hd.img.gz
deleted file mode 100644
index 7ccbceb1..00000000
Binary files a/assets/empty-hd.img.gz and /dev/null differ
diff --git a/scripts/ci b/scripts/ci
index fb50b2cb..0a2d2382 100755
--- a/scripts/ci
+++ b/scripts/ci
@@ -9,4 +9,4 @@ fi
 
 docker build -t ros-build-base -f Dockerfile.build-base .
 docker build -t ros-build -f Dockerfile.build .
-./scripts/docker-run.sh make -f Makefile.docker build-all
+./scripts/docker-run.sh make -f Makefile.docker build-all integration-tests
diff --git a/scripts/docker-run.sh b/scripts/docker-run.sh
index c3bf3b8d..4993ab9b 100755
--- a/scripts/docker-run.sh
+++ b/scripts/docker-run.sh
@@ -8,6 +8,9 @@ if [ -n "$BIND_DIR" ]; then
     fi
     DOCKER_ARGS="-t -v $BIND_DIR:/go/src/github.com/rancherio/os"
 fi
+if [ -c /dev/kvm ] || [ "${PRIVILEGED}" == "1" ]; then
+    DOCKER_ARGS="${DOCKER_ARGS} --privileged"
+fi
 
 docker rm -fv ros-build >/dev/null 2>&1 || true
 exec docker run -i -v /var/run/docker.sock:/var/run/docker.sock $DOCKER_ARGS --name=ros-build ros-build "$@"
diff --git a/scripts/run b/scripts/run
index 62387d4a..1cb3f10e 100755
--- a/scripts/run
+++ b/scripts/run
@@ -22,7 +22,7 @@ HD_GZ=${BASE}/assets/empty-hd.img.gz
 INITRD_TMP=${BUILD}/$(${sha1sum} ${INITRD} | awk '{print $1}')
 INITRD_CURRENT=${BUILD}/initrd-current
 INITRD_TEST=${BUILD}/initrd.test
-USER_DATA=cloud-init/openstack/latest/user_data
+USER_DATA=${BUILD}/cloud-config/openstack/latest/user_data
 
 # PREREQ: brew install coreutils
 path() {
@@ -45,6 +45,11 @@ while [ "$#" -gt 0 ]; do
                 exit 1
             fi
             ;;
+        --xhyve)
+            if [ "$UNAME" == "Darwin" ] && [ -x $(which xhyve) ]; then
+                XHYVE=1
+            fi
+            ;;
         *)
             break
             ;;
@@ -77,14 +82,15 @@ ln -sf ${INITRD_TMP} ${INITRD_CURRENT}
 mkdir -p ${INITRD_TMP}/usr/{bin,share/ros}
 cp bin/rancheros ${INITRD_TMP}/usr/bin/ros
 cp -f os-config.yml ${INITRD_TMP}/usr/share/ros
-cd ${INITRD_TMP}
 
+pushd ${INITRD_TMP}
 find . | cpio -H newc -o > ${INITRD_TEST}
+popd
 
 if [ ! -e ${HD} ]; then
     mkdir -p $(dirname ${HD})
-    if [ "$UNAME" == "Darwin" ]; then qemu-img create -f raw -o size=10G ${HD}
-    elif [ "$UNAME" == "Linux" ]; then gzip -dc ${HD_GZ} > ${HD};
+    if [ "$XHYVE" == "1" ]; then qemu-img create -f raw -o size=10G ${HD}
+    else qemu-img create -f qcow2 -o size=10G ${HD}
     fi
 fi
 
@@ -103,18 +109,18 @@ else
     done
 fi
 
-KERNEL_ARGS="rancher.password=rancher rancher.modules=[9p,9pnet_virtio] console=ttyS0 ${QEMU_APPEND}"
+KERNEL_ARGS="quiet rancher.password=rancher console=ttyS0 ${QEMU_APPEND}"
+KERNEL_ARGS="${KERNEL_ARGS} rancher.state.formatzero=true rancher.state.autoformat=[/dev/sda,/dev/vda]"
 
-if [ "$UNAME" == "Darwin" ] && [ -x $(which xhyve) ]; then
+CLOUD_CONFIG_ISO="${BUILD}/cloud-config.iso"
+rm -rf ${CLOUD_CONFIG_ISO}
 
-    CLOUD_CONFIG_ISO="$(pwd)/cloud-config.iso"
-    rm -rf ${CLOUD_CONFIG_ISO}
+mkisofs -R -V config-2 -o "${CLOUD_CONFIG_ISO}" "$BUILD/cloud-config"
 
-    # PREREQ: brew install cdrtools
-    mkisofs -R -V config-2 -o "${CLOUD_CONFIG_ISO}" "$(pwd)/cloud-init"
+if [ "$XHYVE" == "1" ]; then
 
     echo PWD=`pwd`
-    exec sudo xhyve -A -H -P -u \
+    exec sudo -n xhyve -A -H -P -u \
         -m 4G \
         -s 0:0,hostbridge -s 31,lpc \
         -l com1,stdio \
@@ -122,9 +128,12 @@ if [ "$UNAME" == "Darwin" ] && [ -x $(which xhyve) ]; then
         -s 3,ahci-cd,${CLOUD_CONFIG_ISO} \
         -s 4,virtio-blk,${HD} \
         -U a01fb25c-3a19-4759-a47a-2e353e51807d \
-        -f kexec,${KERNEL},${INITRD_TEST},"earlyprintk=serial elevator=noop rancher.state.formatzero=true rancher.state.autoformat=[/dev/sda,/dev/vda] ${KERNEL_ARGS}"
+        -f kexec,${KERNEL},${INITRD_TEST},"earlyprintk=serial elevator=noop ${KERNEL_ARGS}"
 
-elif [ "$UNAME" == "Linux" ] && [ -x $(which qemu-system-x86_64) ]; then
+elif [ -x $(which qemu-system-x86_64) ]; then
+    if [ -c /dev/kvm ] && [ -r /dev/kvm ] && [ -w /dev/kvm ]; then
+        KVM_ENABLE="-machine accel=kvm -cpu host"
+    fi
     exec qemu-system-x86_64 -serial stdio \
         -kernel ${KERNEL} \
         -initrd ${INITRD_TEST} \
@@ -132,14 +141,12 @@ elif [ "$UNAME" == "Linux" ] && [ -x $(which qemu-system-x86_64) ]; then
         -net nic,vlan=0,model=virtio \
         -net user,vlan=0,hostfwd=tcp::2222-:22,hostname=rancher-dev \
         -drive if=virtio,file=${HD} \
-        -machine accel=kvm \
-        -cpu host \
+        ${KVM_ENABLE} \
         -smp 4 \
-        -fsdev local,id=conf,security_model=none,readonly,path=$(pwd)/cloud-init \
-        -device virtio-9p-pci,fsdev=conf,mount_tag=config-2 \
+        -cdrom ${CLOUD_CONFIG_ISO} \
         -append "${KERNEL_ARGS}" \
-        -serial mon:telnet:localhost:4444,server,nowait \
         -nographic \
+        -display none \
         ${QEMU_ARGS} "${@}"
 else
     exit 42
diff --git a/scripts/ssh b/scripts/ssh
index 30dc486c..6455ca72 100755
--- a/scripts/ssh
+++ b/scripts/ssh
@@ -7,10 +7,24 @@ chmod 0600 ./assets/rancher.key
 
 UNAME=$(uname)
 
-if [ "$UNAME" == "Darwin" ]; then
+while [ "$#" -gt 0 ]; do
+    case $1 in
+        --xhyve)
+            shift 1
+            if [ "$UNAME" == "Darwin" ] && [ -x $(which xhyve) ]; then
+                XHYVE=1
+            fi
+            ;;
+        *)
+            break
+            ;;
+    esac
+done
+
+if [ "$XHYVE" == "1" ]; then
     HOST=192.168.64.2  #  consult `/var/db/dhcpd_leases` or delete it
     exec ssh -F ./assets/scripts_ssh_config -i ./assets/rancher.key rancher@${HOST} "$@"
-elif [ "$UNAME" == "Linux" ]; then
+else
     exec ssh -p 2222 -F ./assets/scripts_ssh_config -i ./assets/rancher.key rancher@localhost "$@"
 fi
 
diff --git a/tests/container/README.txt b/tests/container/README.txt
deleted file mode 100644
index 76616d3c..00000000
--- a/tests/container/README.txt
+++ /dev/null
@@ -1 +0,0 @@
-RancherOS In-VM Integration Tests
diff --git a/tests/container/rancheros/invmtest/test_sample.py b/tests/container/rancheros/invmtest/test_sample.py
deleted file mode 100644
index 1030a2e3..00000000
--- a/tests/container/rancheros/invmtest/test_sample.py
+++ /dev/null
@@ -1,6 +0,0 @@
-def func(x):
-    return x + 1
-
-
-def test_answer():
-    assert func(3) == 4
diff --git a/tests/container/requirements.txt b/tests/container/requirements.txt
deleted file mode 100644
index 8d2f15f3..00000000
--- a/tests/container/requirements.txt
+++ /dev/null
@@ -1,3 +0,0 @@
-flake8==2.4.0
-pytest==2.7.0
-tox==1.9.2
diff --git a/tests/container/setup.py b/tests/container/setup.py
deleted file mode 100644
index 2d44c6cc..00000000
--- a/tests/container/setup.py
+++ /dev/null
@@ -1,11 +0,0 @@
-from distutils.core import setup
-
-setup(
-    name='RancherOSInVMTests',
-    version='0.1',
-    packages=[
-        'rancheros.invmtest'
-    ],
-    license='ASL 2.0',
-    long_description=open('README.txt').read(),
-)
diff --git a/tests/container/tox.ini b/tests/container/tox.ini
deleted file mode 100644
index 7052d0fb..00000000
--- a/tests/container/tox.ini
+++ /dev/null
@@ -1,12 +0,0 @@
-[tox]
-envlist=flake8, py27
-
-[testenv]
-deps=-rrequirements.txt
-changedir={toxinidir}
-commands=py.test --durations=20 {posargs}
-
-[testenv:flake8]
-deps=-rrequirements.txt
-changedir={toxinidir}
-commands=flake8 rancheros
diff --git a/tests/integration/rancherostest/conftest.py b/tests/integration/rancherostest/conftest.py
index 6f64c247..e81b2083 100644
--- a/tests/integration/rancherostest/conftest.py
+++ b/tests/integration/rancherostest/conftest.py
@@ -1,10 +1,11 @@
 import os
 import pytest
+import subprocess
 
 
 @pytest.fixture(scope="session", autouse=True)
 def chdir_to_project_root():
     os.chdir('../..')
-    print('\nChdir to project root dir')
+    print('\nChdir to project root dir: ' + subprocess.check_output('pwd'))
     os.chmod('./tests/integration/assets/test.key', 0o600)
     print('Also, `chmod 600 tests/integration/assets/test.key` to make ssh happy')
diff --git a/tests/integration/rancherostest/test_00_system.py b/tests/integration/rancherostest/test_00_system.py
index 920d2bfe..32ab6dea 100644
--- a/tests/integration/rancherostest/test_00_system.py
+++ b/tests/integration/rancherostest/test_00_system.py
@@ -10,7 +10,7 @@ def qemu(request):
 
 def rancheros_version():
     with open('./scripts/version') as f:
-        for ln in iter(f.readline, ''):
+        for ln in f:
             (k, _, v) = ln.partition('=')
             if k == 'VERSION' and v.strip() != '':
                 return v.strip()
@@ -19,13 +19,14 @@ def rancheros_version():
 
 @pytest.mark.timeout(30)
 def test_system_boot(qemu):
-    with qemu.stdout as f:
-        for ln in iter(f.readline, ''):
-            ros_booted_substr = str.find(ln, 'RancherOS {v} started'.format(v=rancheros_version()))
-            print(str.strip(ln))
-            if ros_booted_substr > -1:
-                assert True
-                return
+    version = rancheros_version()
+    print('parsed version: ' + version)
+    for ln in u.iter_lines(qemu.stdout):
+        ros_booted_substr = str.find(ln, 'RancherOS {v} started'.format(v=version))
+        print(str.strip(ln))
+        if ros_booted_substr > -1:
+            assert True
+            return
     assert False
 
 
@@ -38,8 +39,8 @@ def test_run_system_container(qemu):
         './scripts/ssh sudo system-docker run --rm busybox /bin/true', shell=True,
         stdout=subprocess.PIPE, stderr=subprocess.STDOUT, universal_newlines=True)
 
-    with ssh, ssh.stdout as f:
-        for ln in iter(f.readline, ''):
-            print(str.strip(ln))
+    for ln in u.iter_lines(ssh.stdout):
+        print(str.strip(ln))
+    ssh.wait()
 
     assert ssh.returncode == 0
diff --git a/tests/integration/rancherostest/util.py b/tests/integration/rancherostest/util.py
index de6b4994..f17f85ee 100644
--- a/tests/integration/rancherostest/util.py
+++ b/tests/integration/rancherostest/util.py
@@ -3,6 +3,10 @@ import subprocess
 import time
 
 
+def iter_lines(s):
+    return iter(s.readline, '')
+
+
 def run_qemu(request, run_args=[]):
     subprocess.check_call('rm -f ./state/empty-hd.img', shell=True)
     print('\nrm ./state/*')
diff --git a/tests/integration/requirements.txt b/tests/integration/requirements.txt
index 9f903942..59cebadf 100644
--- a/tests/integration/requirements.txt
+++ b/tests/integration/requirements.txt
@@ -1,10 +1,2 @@
-PyYAML.Yandex==3.11.1
-flake8==2.4.0
-mccabe==0.3
-pep8==1.6.2
-py==1.4.27
-pyflakes==0.8.1
-pytest==2.7.0
-pytest-timeout==0.4
-tox==1.9.2
-virtualenv==12.1.1
+PyYAML==3.11
+pytest==2.7.2
diff --git a/tests/integration/tox.ini b/tests/integration/tox.ini
index 20c60287..28f44931 100644
--- a/tests/integration/tox.ini
+++ b/tests/integration/tox.ini
@@ -1,14 +1,13 @@
 [tox]
-envlist=flake8, py34
+envlist=flake8, py27
+skipsdist=True
 
 [testenv]
 deps=-rrequirements.txt
-changedir={toxinidir}
-commands=py.test --durations=20 {posargs}
+commands=py.test -s --durations=20 rancherostest {posargs}
 
 [testenv:flake8]
-deps=-rrequirements.txt
-changedir={toxinidir}
+deps=flake8
 commands=flake8 rancherostest
 
 [flake8]